Realtor’s Fee – Who Pays

Who Pays the Realtor

Real Estate Agents Fees 

It Depends

As I mentioned in in my Blog titled “Should You Use a Buyer’s Agent?”: Realtors’ Fees are under pressure these days. The use of the web and mobile apps are changing the real estate market. People keep asking: “why should I use a Realtor?” Someone pays the 4-7% fee to the agents and brokers. In that article, I gave an offhand comment that while the seller agrees to the fee, YOU the buyer pay the fee.

However, I want to be clearer about who has the burden of the Fees. It is true that at closing the money comes out of the sale of the home and that is the price you pay. It is also true that I don’t think you can ignore the incremental cost of an agent. Finally, the seller knows the money that he is willing to sell the house, then he tacks on the cost of the realtors’ commissions and that is his bottom line price to you if you go through a Realtor. Which is not quite true; it is an over simplification. The reality is that depending on the type of market, buyers’, Sellers’ or neutral market, the answer is “It Depends.”

Let’s Dig In

So, let’s dig into this “Who Pays for a Realtor?” and really know how to assess it in your negotiations.But first, you need to understand a few key terms: .

  • Average Monthly Sales is the number of homes sold over that last year divide by 12;
  • Months of Inventory is the number of home on the market divided by the Average Monthly Sales. Of course this has to be for the similar homes in the same area or similar areas;
  • Buyer’s Market means that there are more homes for sale in the area than the number of buyers can consume in a reasonable time (approximately over 8 Months of Inventory);
  • Neutral Market is when there is approximately 5 to 7 Months of Inventory;
  • Seller’s Market is when there is a shortage of homes on the market where everyone want to live
    (approximately less than 5 Months of Inventory). 

Buyer’s Market

Considering that the Buyer has the leverage, you would assume that the seller bears the brunt of the cost of selling. This would include the Realtor’s commissions correct? That depends more on the need for the seller to sell in a time frame. Certainly, if the buyer has to sell, then the seller has little leverage in a buyer’s market, the cost of the agent falls on the seller more than the buyer. Why? Because the buyer has other options to buy a home that is similar to the seller’s home and the seller has a limited time frame. But what if the seller can wait or home is unique? Then more of the cost resorts to the buyer.

Remember, it is about finding a substitution.  Consider the following example: A buyer sees a beautiful 3/3 house of 2600 sq./ft. for $900K on a double lot and the next best choices are 6 different 3/2 houses 2100 sq./ft for $750K on a single lot. Let’s assume that everything is equal.  The seller of the $900K home has no substitution risk therefore while the buyer might try to negotiate the $900K down, the buyer has little leverage unless the seller has to sell.  However, the buyer does have the leverage on the 6 homes. So the downward pressure forces the seller to eat the real estate agents’ fees. This is why more people do FSBO (For Sale by Owner) during downturns. Because the seller eats the costs.

Unfortunately, if you wanted the $900K home, then the buyer actually eats the fees. Unless seller has to sell, then the seller will lower his expectations of the amount he has to take.

Neutral Market

Who do you think pays the fees this time? The interesting thing about a Neutral Market is that both the buyer and the seller share the burden of the Realtors’ fees. This is intuitive, but it is not for the reasons most people think. The reason is very subtle. The fact that there are enough buyers and sellers to create a market that allows substitution is not really the reason. It is because at this market is a closed market. Because buyers will want to find homes faster and the seller will want to sell faster, they both will use real estate agents to speed the process.

Once again, there are exceptions. But, as a rule the burden for fees is split. 

Seller’s Market

Long gone are the days when a home had multiple offers competing for homes and driving the closing price above the asking price. However, they do still happen in some markets. However, you don’t need to have a feeding frenzy to have a Seller Market. Any Market that is priced right and the homes sell quickly is a Seller’s Market. The bad news for the buyer’s is that the real estate agents’ fees are their burden to bear. 

*Disclaimer: Any opinions expressed in this newsletter are that of Dave Carr. I am not a Realtor, economist or financial adviser. I strongly recommend that for any specific investment decisions, it is advised that one consults with a licensed financial adviser. This includes buying or selling a home. This Article was inspired by Damon Rhys’ Blog at https://www.hawaiidamon.com/blog/

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